LIVE MARKETS Cheap UK equities: value trap or opportunity?

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  • European shares up 2%
  • Tech and miners lead gains
  • Omicron worries recede
  • Nasdaq futures rally

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CHEAP UK EQUITIES: VALUE-TRAP OR OPPORTUNITY? (1123 GMT)

Remember a year ago? The timing looked perfect to jump into the British stock market. The reopening trade was in full swing thanks to the COVID-19 vaccine breakthrough and the FTSE 100 looked like the proxy of choice to ride that train.

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The British blue cheap index ticked so many boxes: full of cheap cyclicals such as miners, banks financials, oil majors, you name it!

Plus the country's vaccine rollout was beginning well ahead of the rest of Europe and it was thought that Brexit road bumps would start easing moving forward.

But so far, 2021 rings a familiar bell with another year of underperformance.

Investing in UK equities since the 2016 Brexit referendum has proven to be quite a disappointing trade in comparison with the rest of Europe or the U.S., even when you take into consideration the currency swings:

sd

As a result of years of underperformance, British stocks are cheap, very cheap, and have been very cheap for a while now:

ds

But while the FTSE 100 has the track record of a value trap, it's just really too cheap to be ignored.

As analysts at Liberum put it in a note : "it is rare to find a market that is both cheap and fast growing, yet when we look at global equity markets right now, the UK stock market offers just that".

Alex Wright, a portfolio manager at Fidelity sees plenty of opportunity in UK equities in 2022, thanks notably to a rise in M&A due to the valuation gap.

"We favour companies with strong supply chains and those well positioned to capitalise on the shortages in areas such as building materials and car distribution and hire", he wrote, adding they have their largest sector exposure in life insurers.

At AJ Bell, Investment Director Russ Mould acknowledges past performances don't make a great case for the UK.

"It is possible to argue that the UK stock market is cheap because it deserves to be", he says.

Indeed, he notes it is home to "the unpredictable (oils and miners), the indigestible (banks and insurers) and the beyond-the-pale, at least so far as ESG screens are concerned (tobacco, oils, miners, bookmakers and defence stocks)".

But, yet again, Mould notes the FTSE 100 is roughly at the same level it was at the end of 2016 and this constitutes a valuation gap that might make it worth of giving it another go.

"In 2022, aggregate FTSE 100 net profit is forecast to be double where it was in 2016 and dividends are expected to come in more than one-fifth higher", he writes.

"Throw in how the pound is still 10% lower against the dollar and euro than it was at the time of 2016’s EU membership referendum and contrarians will be tempted to give the UK market another try in the coming 12 months".

(Julien Ponthus, Danilo Masoni and Saikat Chatterjee)

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U.S. RATES: WHEN HIKE MEANS CUT (1051 GMT)

The general idea is that if central banks stumble into raising interest rates sooner than they should, then the short end of the yield curve should rise while the longer end falls.

Such a reaction would mean that financial markets forecast that the hastily-executed rate hike will weaken the economy and central banks will be forced to lower rates in the future.

According to ING analysts in the U.S. we are not there yet, but, “at face value, markets seem to heed the Fed’s hawkish warnings with higher short rates, but the curve is increasingly sending some concerning signals.”

“Fed Fund forwards now imply that the Fed might cut rates in 2025 after raising them roughly five times,” they say.

“We are still far from markets pricing a full-blown policy error as it is routinely the case in central and easter Europe and the UK, but it shows concerns about the effects of Fed tapering,” they add.

Bottom line, “if this rate cut discount persists, or even worsens, it will display even more clearly investors’ scepticism that central banks can engage in a meaningful tightening.”

Below the ING's chart on Fed Fund forwards.

FedFundF

(Stefano Rebaudo)

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GIMME MORE (BITCOIN) (0924 GMT)

Notwithstanding Bitcoin's rocky ride in 2021 and numerous warnings from regulators, investors are making a beeline to snap up the world's most popular cryptocurrency, according to a survey conducted by Grayscale Investments, the world's largest digital currency manager and financial market research firm 8 Acre Perspective. Among the key findings:

  • More than one-quarter (26%) of surveyed investors already own Bitcoin
  • More than half (59%) of surveyed investors are interested in Bitcoin investments - marking a notable increase from 2020 (55%) and 2019 (36%)
  • More than half (55%) of investors who currently own Bitcoin began investing over the last 12 months
  • Interest in Bitcoin investment products rose significantly among older investors -- between ages 55 and 64 (46% in 2021 from 30% in 2020) -- and female investors (53% in 2021 from 47% in 2020)
  • Most Bitcoin owners (87%) own one or more other digital currencies

Grayscale, which has more than $51 billion in assets under management, also noted that the demographics of bitcoin investors shifted noticeably towards the older generation from previous years.

Bitcoin

(Saikat Chatterjee)

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BUY EVERYTHING (0859 GMT)

Yet another suggestion that Omicron isn't going to cause severe illness (from Dr. Fauci) has provided traders what they needed to jump back into markets with a risk-on mindset. Monetary easing from China also came in play.

As a result European shares are off to a very solid start this morning with the STOXX 600 (.STOXX) rallying for a second straight session, up 1.6% and set for its biggest two-day jump since Pfizer's vaccine breakthrough announcement in Nov. 2020.

No sector is in the red, a euro zone volatility gauge (.V2TX) is giving back recent gains, tech (.SX8P) is stand-out gainer, up 3.6%, and 91% of the STOXX is posting gains.

Here's your opening snapshot:

snapshot

(Danilo Masoni)

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OMICRON! WHAT OMICRON? (0743 GMT)

That broadly seems to be the tone in global markets on Tuesday as investors ramped up bets that the new Omicron variant may not prove to be as deadly as previously feared. World stocks are on track for their biggest daily rise in nearly two months, money markets are back to pricing the U.S. rate hike by June 2022 and the dollar has clawed back half of its losses against the perceived safe-haven Japanese yen since the variant first hit the headlines.

Even policymakers are optimistic. Australia’s central bank indicated the Omicron variant outbreak was unlikely to derail the current financial recovery while top U.S. infectious disease official Anthony Fauci told CNN, "it does not look like there's a great degree of severity" so far. read more

More good news also came from Beijing which cut the amount of cash that banks must hold in reserve on Monday, its second such move this year, releasing about $188 billion funds in long-term liquidity to bolster slowing economic growth. Though questions remain over the future of China Evergrande Group (3333.HK) with a number of bondholders in the heavily indebted property developer saying they did not receive coupon payments by the end of a 30-day grace period on Monday New York time.

Investors pushed European and U.S. stock futures higher, expecting the broader economic recovery won’t get derailed in 2022.

Expectations that global central banks won’t rush to tighten policy immediately propped up Chinese shares and boosted the Australian dollar. Indeed, JPMorgan’s strategists postponed their call for the first UK interest rate hike to February from December earlier despite robust labour market data. Market gauges of volatility also slipped back with both European and U.S. gauges well below last week’s highs.

Oil prices ticked higher, consolidating a nearly 5% rebound the day before and cryptocurrencies resumed picking up the pieces after a bruising fall over the weekend.

Can central banks calm volatile markets?

Key developments that should provide more direction to markets on Tuesday:

  • Speaker corner: ECB's Lagarde, Guindos, Schnabel
  • Germany ZEW survey
  • Eurozone revised Q3 GDP
  • U.S. trade balance
  • Chile inflation data

(Saikat Chatterjee)

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EUROPE: REBOUND GATHERING STEAM (0724 GMT)

European shares look set for a second straight day of solid gains with index futures rising almost 1% and investors pointing to easing worries over the Omicron virus variant.

Over in Asia, shares recovered on the receding virus worries but also supported by a policy easing move by China's central bank in a bid to bolster slowing economic growth. read more

U.S. stock futures also pointed to another strong session later on Wall Street after yesterday's positive close.

It seems investors have been reassured by top U.S. infectious disease official Anthony Fauci who, speaking about Omicron, told CNN that "thus far it does not look like there's a great degree of severity to it." read more

(Danilo Masoni)

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